Additions to the Model: External Sector, Labor Market, Consumption Technology and Welfare Evaluation

The basic model we have thus far developed offers a comprehensive view of the resource allocation process in a closed economy with or without a government sector. These settings, valuable as they are as learning devices, are nonetheless restricted as far as actual policy applications are concerned. We need to further elaborate the model structure and we will do so next by introducing an external sector—hence opening the economy to trading partners—and by allowing some domestic resources, most notably labor, to remain partly unused. These are two phenomena that cannot be ignored in any economy-wide modeling exercise that wants to be capable of handling real-world issues. Finally, we will discuss a limitation of the present version of the model which is more of an empirical and data related nature and has to do with the fact that the goods demanded by households may not correspond to the goods produced by firms.